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Nuggets of Wisdom

Saturday, April 6, 2013

What Deregulation?

The main narrative behind our economic crisis is that massive deregulation, especially under George W. Bush, created it. To this, one must ask, “What deregulation?”

If deregulation truly destroyed our economy, then the evidence would show that regulation in this country has been decreasing; instead, all evidence points to the contrary: that regulation has been increasing! The pages of the Federal Register, which contains every federal rule and regulation, have exponentially increased by 600 percent, from over 100 thousand pages in the 1940s to over 700 thousand pages in the 2000s. The EPA alone has increased their federal regulations by 220 percent, from over 7 thousand rules in 1976 to over 169 thousand in 2009. Over three thousand new regulations are enacted every year, with a new rule being created every 2 hours. Indeed, it’s no wonder that America ranks as the fourth most overregulated country in the world behind China, India, and Japan.

Even when confronted with this evidence, most people still insist that deregulation destroyed the economy, arguing that it’s not the level of deregulation that matters, but the deregulation of certain industries—specifically banking. The example often cited is the Gramm–Leach–Bliley Act of 1999, which repealed provisions in the Glass–Steagall Act that prevented commercial banks from doubling as investment banks. This repeal allegedly allowed banks to engage in risky investments that lead to the economic crisis.

However, most economists on both sides disagree with this assessment, arguing that Gramm–Leach–Bliley (which was passed by a bipartisan Congress and signed by a Democratic president) did not create the crisis, and in fact may have actually softened its impact on the economy. According to FactCheck.org, “deregulated banks were not the major culprits in the current debacle. Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase have weathered the financial crisis in reasonably good shape, while Bear Stearns collapsed and Lehman Brothers has entered bankruptcy, to name but two of the investment banks which had remained independent despite the repeal of Glass-Steagall.”

So if deregulation didn’t create our economic crisis, does that mean regulation did? In a word, yes. While a certain level of regulation is necessary, too much can create an unnecessary burden on businesses, especially small and new ones. This is why big business often lobbies for more—not less—regulation in order to crush their competition. One would assume that food companies would oppose stricter food safety laws, oil companies would oppose clean air regulation, and tobacco companies would oppose regulation on tobacco and tobacco advertising; yet Kraft Foods, General Motors, and Phillip Morris have all spent millions lobbying for the exact opposite! The end result is that federal agencies end up being controlled by the very corporations they were meant to regulate, thus creating “regulatory capture.”

Certain regulation, while well-meaning, can also throw a monkey wrench into the machine of the private sector, thus creating disastrous—albeit unintended —consequences. Case in point: the Community Reinvestment Act of 1977, which required banks to lend loans to poor people so they could buy houses they couldn’t afford, thus aiding in the housing bubble, along with its inevitable burst when these people couldn’t pay back their loans. While the CRA may not have been the main cause of the economic crisis, it did play an underlying role in its inception.

It must therefore follow that if regulation has been increasing rather than decreasing, and if these regulations have done more harm than good, than the logical solution must be to decrease regulation and allow the market to correct itself without government interference. Most people would object to this, and claim that “further” deregulation would cause an economic collapse that would reduce America to a Somalian wasteland. This implies that countries with low levels of regulation and taxation are economically worse; however, all evidence points to the contrary. Both Hong Kong and Switzerland have freer economies than the United States, with Hong Kong ranked as the freest economy on earth. Both countries have low levels of taxation and regulation. They also have high GDP and living standards. The reason seems clear enough: with greater economic freedom comes greater prosperity and therefore greater personal freedom.

So now the economy stands on a crossroads where it can choose one of two paths: either it can follow the same-old narrative that deregulation ruined the economy and thus continue increasing regulation—which will only constrain the private sector and prevent it from creating new jobs, or it can look at the evidence, realize deregulation is not to blame for our economic mess, and commence freeing the market of unnecessary and burdensome regulations, therefore promoting economic growth and prosperity. Which will it be?